The Zacks Retail – Restaurants industry is benefiting from increased sales. Rapid menu price hikes, average check growth and expansion efforts act as tailwinds. Industry participants also benefit from partnerships with delivery channels and digital platforms. Stocks like Brinker International, Inc. EAT, BJ's Restaurants, Inc. BJRI, Kura Sushi USA, Inc. KRUS and El Pollo Loco Holdings, Inc. LOCO are well-poised to benefit from the aforementioned factors.
Industry Description
The Zacks Retail – Restaurants industry comprises several owners and operators of casual, upscale casual, fine dining, full-service and fast-casual restaurants. Some industry participants operate as roasters, marketers and retailers of specialty coffee. Some companies develop, operate and franchise quick-service restaurants worldwide. A few restaurant operators offer cooked-to-order dishes, which include noodles and pasta, soups, salads and appetizers. Some industry players develop, own, operate, manage, and license restaurants and lounges worldwide. A few companies also run technology-enabled Japanese restaurants in the United States and provide Japanese cuisine through a revolving sushi service model.
4 Trends Shaping the Future of the Restaurant Industry
Robust Sales Growth: Restaurant sales continued their strong momentum in January, as consumers remained committed to dining out despite economic uncertainties. According to preliminary data from the U.S. Census Bureau, eating and drinking establishments generated $98.6 billion in seasonally adjusted sales, marking a steady increase from the previous month. This growth extended the sector's winning streak to 10 consecutive months. Restaurant spending remained notably higher than that a year ago, reflecting the industry's resilience and the sustained preference for dining experiences.
Digitalization to Drive Growth: Restaurant operators' focus on digital innovation, sales-building initiatives and cost-saving efforts has been a catalyst. With the growing influence of the Internet, digital innovation is the need of the hour. Restaurant operators constantly partner with delivery channels and digital platforms to drive incremental sales. Partnerships with delivery channels like DoorDash, Grubhub, Postmates and Uber Eats, and the rollout of self-service kiosks and loyalty programs continue to drive growth.
Off-Premise Sales Act as Key Catalyst: The industry is gaining from the increase in off-premise sales, which primarily include delivery, takeout, drive-thru, catering, meal kits and off-site options, such as kiosks and food trucks. Most restaurant operators have initiated the testing of ghost or virtual kitchens. The idea of providing off-premise offerings and a connected curbside service has been garnering positive customer feedback.
Traffic Woes & High Costs Linger: The restaurant industry has been facing declining traffic for quite some time. A rapid increase in menu prices is the primary reason behind traffic erosion. This decline highlights the ongoing challenges that the industry faces with maintaining customer counts, especially as consumers grow frustrated with rising prices. Then again, restaurant operators are grappling with the high cost of operations. Intense competition, high wages and food cost inflation are concerning. The industry continues to bear increased expenses, which have been affecting margins. Higher pre-opening costs, marketing expenses and costs related to sales-boosting initiatives are exerting pressure on the company's margins.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Restaurant industry is grouped within the broader Retail-Wholesale sector. It carries a Zacks Industry Rank #65, which places it in the top 26% of more than 248 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry's position in the top 50% of the Zacks-ranked industries results from a positive earnings outlook for the constituent companies in aggregate. Before we present a few stocks that you may want to consider for your portfolio, let us take a look at the industry's recent stock-market performance and valuation picture.
Industry Underperforms the S&P 500 & Sector
The Zacks Retail – Restaurants industry has underperformed the Zacks S&P 500 Composite and its sector over the past year.
Over this period, the industry has grown 5.7% compared with the Zacks S&P 500 Composite's jump of 19.7%. The sector has risen 23.9%.
One-Year Price Performance
Restaurant Industry's Valuation
Based on the forward 12-month P/E, a commonly used multiple for valuing restaurant stocks, the industry is currently trading at 26.74X compared with the S&P 500's 22.23X. It is above the sector's forward 12-month P/E ratio of 24.64X.
Over the last five years, the industry traded as high as 34.67X and as low as 20.97X, the median being at 24.40X.
4 Key Restaurant Picks
Brinker: The company remains steadfast in its goal to drive traffic and revenues through a range of sales-building initiatives, such as streamlining the menu and its innovation, strengthening its value proposition, better food presentation, advertising campaigns, kitchen system optimization, and the introduction of a better service platform.
Shares of this Zacks Rank #1 (Strong Buy) company have skyrocketed 231.3% in the past year. EAT's fiscal 2025 sales and earnings are anticipated to rise 18.7% and 98.8%, respectively, year over year. You can see the complete list of today's Zacks #1 Rank stocks here..
Price and Consensus: EAT
BJ's Restaurants: The company has been benefiting from solid Pizookie Meal Deal performance and loyalty program membership expansion. Also, higher guest traffic and average checks, resulting from menu price increases, changes in mix and a higher level of promotions are adding to the positives. Cost-saving and margin expansion plans bode well.
Shares of this Zacks Rank #1 company have gained 9.5% in the past year. BJRI's 2025 sales and earnings are anticipated to rise 3.2% and 2%, respectively, year over year.
Price and Consensus: BJRI
Kura Sushi: The company is benefiting from store openings and the return of comparable sales to positive territory. The company remains focused on cost-control measures, strategic expansion, and driving operational excellence to sustain its momentum and deliver growth in the coming periods.
Shares of this Zacks Rank #1 company have declined 31.7% in the past year. KRUS's fiscal 2025 sales and earnings are anticipated to rise 18.3% and 237.5%, respectively, year over year.
Price and Consensus: KRUS
El Pollo Loco: The company is benefiting from increased system-wide comparable restaurant sales. El Pollo Loco is taking cost-saving measures, ensuring that food quality and customer experience are enhanced throughout the process. LOCO's 2025 plans emphasize a blend of innovation and value while leveraging the company's core strength — its reputation for offering the best chicken. The company recognizes that achieving long-term success requires a focus on improving customer traffic trends and expresses confidence in its strategic approach to attain this goal in the coming years.
LOCO currently carries a Zacks Rank #2 (Buy). The company's 2025 earnings are anticipated to improve 14.5% year over year.
Price and Consensus: LOCO
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Brinker International, Inc. EAT: Free Stock Analysis Report
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This article originally published on Zacks Investment Research (zacks.com).
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